DRAM price declines mean PC vendors will likely add more memory to computers and chipmakers are more likely to move forward on new technology

Anyone looking to add a bit more memory to their computers won a gift from the DRAM industry. Heavy competition has caused prices to tumble and industry analysts predict further price declines.

The contract price of the most widely used DRAM chips, 512MB, DDR2 (double data rate, second generation) chips that run at 667MHz dropped 12.5 percent from two weeks ago to $1.75 each as of Thursday, a new low for this year according to DRAMeXchange Technology, which runs an online trading site for the chips.

That's great news for users for three reasons. DRAM price declines increase the likelihood that PC vendors such as Hewlett-Packard and Dell will add more DRAM to the computers they sell or offer extra DRAM as an incentive; it give users a chance to buy more DRAM on the cheap; and it generally spurs memory chipmakers to move forward on new technology that will ultimately increase computing performance.

Contract DRAM prices for DDR2-667 chips have plunged 70.5 percent so far this year to the Thursday low. The main reason is because memory chipmakers built too many new production lines in anticipation of strong demand for Microsoft's Windows Vista, which requires more DRAM per PC, as well as because stronger DRAM prices in general for the past few years was a sign to some that the market had stabilized, analysts say.

DRAM prices may continue to decline a bit further, but downside appears limited, according to Gartner. Today's pricing is at a similar level to the lows reached in May of this year, when DRAM makers refused to sell because the price had hit their cash cost.

"However, we may see some activity below this level, because some brokers and distributors who are holding inventory may be prepared to sell at a lower price to clear stock," the market researcher said.

Over the years, DRAM makers have tended to place more emphasis on winning market share than on profits, and the current DRAM price declines are symptomatic of their battles. Companies have invested so much money in new factories that the increased output has caused a glut, leading to price declines.

Prices for DRAM chips fell almost 40 percent in the first half of this year, compared to the first half of 2006, offsetting a 66 percent increase in unit shipments, according to the Semiconductor Industry Association.

Contract prices are typically renegotiated between DRAM makers and PC vendors every two weeks. Around four-fifths of all DRAM is sold by contract, while the rest is sold on the spot market, just like commodities such as oil and gold.